The charitable reading of the grant of statutory authority in the clean hydrogen credit under section 45V(f) is that Congress gave Treasury considerable regulatory leeway to tell claimants how to determine the life cycle greenhouse gas emissions that the entire credit hinges on. The less charitable interpretation is that Congress abdicated its responsibility and left Treasury and the IRS to determine the scope of a tax credit that might cost $34.8 billion over 10 years, or much more.
Section 45V(f) says that Treasury has a year from the date of enactment to “issue regulations or other guidance to carry out the purposes of this section, including regulations or other guidance for determining lifecycle greenhouse gas emissions.” That deadline, August 16, 2023, is nearly upon us. And it is a very big deal, as many surprised podcast listeners, online streaming service viewers, and newspaper readers who probably don’t follow energy tax developments have recently learned from paid advertisements. The ads are a novel and not at all positive — regardless of what direction one thinks the guidance should take — development in the tax rulemaking process.
The Joint Committee on Taxation doesn’t provide revenue estimates for Treasury regulations, because the the IRS and Treasury’s role is supposed to be implementing the law enacted by Congress. But the JCT pointed out, while increasing the official estimate, that the cost of the section 45V credit will depend heavily on what the rules from Treasury and the IRS say.
Congress shouldn’t write laws that prompt the revenue estimators to write things like this: “One source of uncertainty when estimating the revenue effects of the clean hydrogen production credit is the manner in which Treasury ultimately regulates qualifying hydrogen.” What the implementation rules say shouldn’t matter so much that the economists, attorneys, and accountants at the JCT consider the rules themselves a source of uncertainty. Uncertainty should be limited to questions like how many companies will decide to invest in clean hydrogen facilities.
The uncertainty in section 45V was created by omission. Before section 45V was part of the Inflation Reduction Act (IRA, P.L. 117-169), it was the Clean H2 Production Act (S. 1807). In that incarnation, it directed the Treasury secretary, in consultation with the secretary of energy and the administrator of the Environmental Protection Agency, to publish guidance “prescribing methods for determining the credit based on lifecycle greenhouse gas emissions.”
The Clean H2 Production Act also provided that “such methods shall consider the emissions associated with any feedstock or energy source which is not co-located at the qualified clean hydrogen production facility,” under specific circumstances that included contracts for the clean production attributes of the feedstock or energy source. That bill generally formed the basis for the Build Back Better Act’s erstwhile section 45X and the IRA’s section 45V, except that in the latter two bills, all the references to methods for determining life cycle greenhouse gas emissions and the consideration of emissions associated with energy sources that are not co-located with the clean hydrogen production facility were stripped out of subsection (f).
The Clean H2 Production Act’s subsection (f) provided that emissions from remote energy sources could be taken into account when (1) the energy source is contractually obtained by the taxpayer, (2) there is sufficient legal assurance that no one else can claim credit for the environmental attributes of the energy source, and (3) environmental attributes of the non-co-located energy source are only considered to the extent the taxpayer consumes an equivalent amount of the energy source in the production of hydrogen. In other words, where the Clean H2 Production Act was specific about allowing clean hydrogen production facilities to use renewable energy certificates, power purchase agreements, and other similar indirect accounting mechanisms, the Inflation Reduction Act was silent.
But two members of Congress weren’t. On the Senate floor during the passage of the IRA, Senate Finance Committee member Thomas R. Carper, D-Del., asked Finance Committee Chair Ron Wyden, D-Ore., whether, in determining the life cycle greenhouse gas emissions in section 45V, Treasury was intended to recognize and incorporate indirect accounting factors that reduce effective greenhouse gas emissions. Wyden said it was. As with most of the rest of the IRA, there is no legislative history to indicate that intent other than the colloquy between Sens. Carper and Wyden.
That colloquy prompted the IRS and Treasury to ask taxpayers, in Notice 2022-58, 2022-47 IRB 483, “Should indirect book accounting factors that reduce a taxpayer’s effective greenhouse gas emissions (also known as a book and claim system), including, but not limited to, renewable energy credits, power purchase agreements, renewable thermal credits, or biogas credits be considered when calculating the section 45V credit?” The unsurprising answer from current and prospective hydrogen industry members was yes, because it is not always easy to locate a clean hydrogen production facility next to the clean electricity source needed to run it.
Coincidentally, at the same time that Treasury and the IRS are preparing to release the hydrogen guidance, the Supreme Court is gearing up to hear Loper Bright Enterprises v. Raimondo, in which the petitioners ask the Court to overturn Chevron or to “at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.”
The second part of the Loper Bright argument, which is probably where the Supreme Court will focus, isn’t directly applicable. Other tax code provisions require taxpayers to determine life cycle greenhouse gas emissions, and they typically also refer to section 211(o)(1)(H) of the Clean Air Act (42 U.S.C. section 7545(o)(1)(H)), which defines life cycle emissions as the “aggregate quantity of greenhouse gas emissions (including direct emissions and significant indirect emissions such as significant emissions from land use changes).” The other provisions generally either require the use of the GREET model, as in the section 45V credit, or allow taxpayers a choice of methods.
But the broader argument over Chevron and the limits of deference to agency interpretations is relevant. The House recently filed an amicus brief arguing that “treating such statutory silence, standing alone, as an ambiguity that triggers Chevron deference upends the relationship between Congress and the agencies it has created.” Chevron step two says that “if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.” The statute in Loper Bright had expressly addressed in other portions of the statute the exact question the agency took up in guidance.
The inclusion and then omission of renewable energy certificates, power purchase agreements, and indirect accounting mechanisms in the clean hydrogen credit proposals demonstrates, as did the statute at issue in Loper Bright, that Congress knew how to give Treasury and the IRS the authority to write rules that included indirect accounting mechanisms and how to incorporate them into the method for determining life cycle greenhouse gas emissions. But Congress didn’t. And the result — of which the evidently expensive advertising campaigns are a symptom — is not good for tax rulemaking.
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